Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99 (2d. Cir. 2002).

Parties  Residential Funding Corporation (“RFC”), Plaintiff  DeGeorge Financial Corporation (“DeGeorge”), Defendant  Litigation involved cross-claims for breach of contract

Timeline  January 4, 2001: Discovery planning conference  August 1, 2001: discovery to be completed  September 1, 2001: trial date  January 19, 2001: Scheduling order entered  April 12, 2001: DeGeorge serves document requests, which included electronic mail  May 22, 2001: RFC has no objection to request for  Early June 2001: Parties agree to obtain hard copies of s

Timeline … and the problems begin  Mid-June 2001: RFC lacks internal resources to retrieve s from back-up tapes  RFC retains Electronic Evidence Discovery, Inc. (“EED”) to assist  Early July 2001: RFC unable to retrieve any s from back-up tapes  DeGeorge requests back-up tapes so it can try to retrieve s  RFC refuses to produce back-up tapes  July 12, 2001: At settlement conference, RFC agrees to engage a vendor to produce s

Timeline  July 25, 2001: EED informs RFC it would take “a couple weeks” to print out s  August 6, 2001: RFC to begin producing s  August 15, 2001: No production from RFC  August 15, 2001: Judge orders production to be completed by August 20, 2001  No production between August 15 th and 20 th  August 21, 2001: RFC informs DeGeorge that s delayed due to technical problems

Timeline  August 24, 2001: RFC produces 128 s- none are from the critical time period of October to December of  RFC claims that either there were no responsive s OR the s did not exist on the back-up tapes  August 29, 2001: More production but still no s from relevant time period  September 1, 2001: DeGeorge again requests tapes to conduct its own investigation  September 3, 2001: RFC agrees to provide back-up tapes to DeGeorge  September 5, 2001: Tapes sent by overnight courier, and arrive the following day

Timeline  September 6, 2001: RFC refuses to answer DeGeorge’s questions regarding the tapes  After conference call with the court, RFC agrees to answer questions  RFC claims that EED could not recover s from tapes because tapes were damaged OR did not contain the s.  September 6-10, 2001: DeGeorge’s vendor locates 950,000 s from relevant time period.  Parties agree to produce 4,000 s that DeGeorge’s vendor printed out

District Court Ruling  September 18, 2001: DeGeorge moves for sanctions, requesting an adverse inference instruction  To obtain an adverse inference charge, a party must show that:  (1) The party with control over the evidence had an obligation to preserve it at the time it was destroyed;  (2)The party that destroyed the evidence had a sufficiently culpable state of mind; and  (3) Some evidence suggests that a document or documents relevant to substantiating the claim of the party seeking sanctions would have been included among the destroyed files.

District Court Ruling  September 20, 2001: Judge denies DeGeorge’s motion for an adverse inference instruction  While RFC acted with “purposeful sluggishness”, DeGeorge did not establish that RFC acted with “bad faith” or “gross negligence”  DeGeorge failed to establish that s would be harmful to RFC  September 24, 2001: Jury verdict for RFC for $96.4 million  DeGeorge asks for the Court of Appeals to vacate the judgment and remand for a new trial.

Arguments  DeGeorge Arguments  The District Court used the wrong legal standard in denying DeGeorge’s motion.  The District Court’s denial of DeGeorge’s motion for sanctions was based on a clearly erroneous view of the evidence.

Rules at Issue  FRCP 26(f): Conference of the Parties  The parties are expected to confer, not only on the nature and basis of their claims and defenses, but also to discuss ‘any issues relating to disclosure or discovery or electronically stored information, including the form or forms in which it should be produced.

Rules at Issue  FRCP 37(b)(2)(A): Failure to comply with a court order  If a party fails to obey a discovery order, the court may make such orders in regard to the failure as are just, including an order that designated facts shall be taken as established for the purposes of the action in accordance with the claim of the party obtaining the order.

Fashioning a Remedy for Non-production of Evidence  Invoke Rule 37(b)(2) if party fails to obey discovery order  If no discovery order, a court may impose sanctions on a party for misconduct in discovery under its inherent power to manage its own affairs  District Court has broad discretion in fashioning sanctions: delay the start of a trial, declare a mistrial if trial has already commenced, or proceed with a trial and give an adverse inference instruction

Issue 1  What is the appropriate legal standard for an adverse inference instruction?  If evidence is not produced in time for use at trial, the party seeking the instruction must show: (1) That the party having control over the evidence had an obligation to timely produce it (2) That the party that failed to timely produce the evidence had a culpable state of mind (3) The missing evidence is relevant to the party’s claim of defense such that a reasonable trier of fact could find that it would support that claim or defense

Court’s Analysis of Issue 1  Legal Standard for an Adverse Inference Instruction:  (1) RFC conceded that it had a duty to preserve and timely produce the back-up tapes.

Court’s Analysis of Issue 1  Legal Standard for an Adverse Inference Instruction  (2) A culpable state of mind includes gross negligence, bad faith AND ordinary negligence The District Court only analyzed whether RFC acted in “bad faith” or with “gross negligence.” It is unclear whether the District Court applied the proper legal standard

Court’s Analysis of Issue 1  Legal Standard for an Adverse Inference Instruction  (3) A finding that a party acted with gross negligence or in bad faith with respect to discovery obligations is ordinarily sufficient to support a finding that the missing evidence would have been harmful to that party Unclear why RFC’s “purposeful sluggishness” did not support DeGeorge’s claim that the s were likely harmful to RFC. If RFC’s “purposeful sluggishness” was grossly negligent or done in bad faith, then it would support an inference that missing s were harmful to RFC.

Issue 2  Whether RFC’s failure to timely produce s was done in bad faith or with gross negligence?  The District Court overlooked some evidence that could support a finding that RFC acted in bad faith or was grossly negligent.  Unclear whether the District Court considered the reasonableness of RFC’s continued reliance on EED throughout months of fruitless attempts to retrieve s.  Number of careless, if not misleading, statements made by RFC to DeGeorge and the District Court regarding the effort to retrieve s.  RFC’s “purposeful sluggishness” may constitute sanctionable misconduct

Instructions on Remand  DeGeorge should have the opportunity to renew its motion for sanctions  Upon consideration of any such motion, the District Court should vacate the judgment and order a new trial if DeGeorge establishes that RFC acted with a sufficiently culpable state of mind and that DeGeorge was prejudiced by the failure to produce the s.

Questions  (1) Is an adverse inference instruction appropriate in cases where a party has failed to timely produce documents, as opposed to destroying documents? Or would a less severe sanction be more appropriate?  (2) Does a requirement of ordinary negligence set the bar too low when imposing an adverse inference instruction?